In 1977, Monty Python’s Life of Brian asked ‘What have the Romans ever done for us?’ to which it appeared, well, quite a lot actually. However, with the imminent changes within the pensions industry, the question you may have to consider is rather ‘What has the Government ever done for us?’
For starters, there is the introduction of the new basic State Pension which from 6th April 2016 will deliver a clearer State Pension for future pensioners. The current basic State Pension and State second pension (S2P) will be abolished and replaced by a single-tier, flat-rate State Pension of £155- a-week paid to everyone who has paid 35 years of National Insurance contributions (NICs).
A change of this magnitude will be rightly debated and queried, and as administrators there are questions that we can expect to be asked, namely why the government has introduced such a significant change. In turn, we can also expect many pensioners to now have a greater focus on their personal pension benefits as members look to clarify how the changes may affect their total monthly income.
The former Pension Minister Steve Webb described the forthcoming introduction of a single-tier State Pension as ‘his legacy’, the aim of which is to provide ‘greater certainty over income in later life’.
It’s certainly true that the drawback of the existing system is that it is complex; based around high levels of means-testing and produces inequality. A key point is that, traditionally, women, carers and self-employed tend to have lower State Pensions since they are less likely to have paid NICs for the required number of years.
The Government clearly wants to address these issues and the aim is to introduce a simpler, fairer system where a younger generation of people have a clearer idea about what the State will provide, making it easier to plan their retirement savings in line with benefits provided by workplace pensions.
Who will be affected?
The new single-tier pension will only affect people reaching State Pension age from 6 April 2016 onwards. That is:
- women born on or after 6 April 1953,
- men born on or after 6 April 1951.
People who fall under the above categories will receive the new State Pension. If they have already started to build up State Pension under the current system, this will be converted into an amount under the new State Pension. Alternatively, if they haven’t built up any State Pension by 6 April 2016, the State Pension will be completely calculated under the new rules.
As the majority of people who will receive the revised Basic State Pension may not currently be in receipt of occupational pension scheme benefits, there will be an expected interest shown in benefits available from retirement age. As administrators, it is important to understand that people may require the full picture of what they might expect to receive.
Existing Pensioners or reaching State Pension age by 6 April 2016
For individuals reaching State Pension Age by 6 April 2016 a new option will been introduced, allowing them to ‘top up’ their State Pension by up to £25 a week by either paying additional NICs or using the new State Pension Top up Scheme. Further information including the State Pension Top-Up Calculator can be found at www.gov.uk/State-pension-topup.
However, for the most part, the current State Pension and benefit systems will continue for those who are already pensioners or who reach State Pension age before 6 April 2016. It is therefore one of the main criticisms of the reforms that existing pensioners are not included and have been left with the complicated old means-tested pension credit system. It is therefore possible that the Government will consider future provision for these individuals with the new regime, without the loss of any current rights.
Increases to the basic State Pension
In the lead up to the 2015 General Election, the government pledged to maintain the value of the State Pension going forward in line with the established increase basis of the ‘triple lock’, which annually increases the Basic State Pension in line with earnings, prices or 2.5% – whichever is higher. At a time of change, the retention of this factor will offer some reassurance to current and forthcoming pensioners.
In preparation of the forthcoming changes, the gov.uk website has been regularly updated with information regarding the Basic State Pension and has become an invaluable tool for employers, trustees and third party administrators aiming to keep up to date and place themselves in the best position to assist with any queries. There are many factors to the forthcoming changes which are covered within gov.uk, and review of the regular updates is recommended.
One key aspect is that the website allows for people to request a State Pension Statement which will tell them how much State Pension they can expect to receive. Further information can be found at: www.gov.uk/State-pension-Statement
There is also a YouTube channel, ‘PensionTube’ which has been set up to help understand the key topics in the industry by providing videos from independent experts, charities and the government on the changes happening to UK Pensions.
This can be found at: www.youtube.com/user/PensionTube
The changes to the Basic State Pension continue a trend for revision within the Pension Industry over the past decade.
The overall aim has always been to encourage people to have a greater awareness of the need for pension savings, with a particular focus on planning for future retirement.
The spotlight is shining brightly upon the biggest revision of the basic State pension in recent years , and we should all be encouraged to prepare for exactly what the government is doing for all of us.